FHA Closing Cost Limits

A home purchase or refinance requires certain fees to be paid at closing.

Borrowers who have trouble getting a home loan under conventional loan standards can turn to government-backed programs such as those offered by the Federal Housing Administration. The FHA, which has insured loans since 1934, has flexible qualifying standards and a low down payment requirement of 3.5 percent. FHA insurance protects lenders against default by reimbursing them when borrowers default. FHA transactions involve fees, also known as closing costs, which come with certain restrictions.

Seller-paid Costs

Borrowers with minimal cash may need help to meet all of their closing costs. The FHA allows sellers to pay a certain percentage of the borrower's closing costs. Seller-paid closing costs, also known as concessions, are limited to 3 percent of the sales price. The seller credits the borrower a lump sum at closing which is applied to the borrower's total cost to close. FHA limits the amount of seller concessions to prevent inflation of home values, since concessions are often used as incentive for higher sale prices.

Non-allowable Fees

FHA closing costs are the "allowable" fees which a borrower can pay in a transaction, as determined by the Department of Housing and Urban Development, which oversees the FHA. Lenders are allowed to charge borrowers only "customary and reasonable costs necessary to close the mortgage loan," according to HUD. A tax service fee is the only closing cost explicitly prohibited by FHA. Tax service fees pay for a third-party to manage the payment of property taxes for the lender's benefit, so lenders are not allowed to pass it along to borrowers.

Origination Fees

FHA lenders usually charge an origination fee for evaluating and preparing the loan. It covers the lender's underwriting, administrative and processing fees, according to the Federal Reserve Board. The FHA limits the origination fee on certain programs. The Home Equity Conversion Mortgage -- FHA's reverse mortgage -- is limited to a 2 percent origination fee. The 203(k) Rehabilitation Mortgage, which allows a borrower to buy and re-construct a property with a single loan, allows for a supplemental origination charge in addition to the origination fee. The supplemental fee is limited to the greater of 1.5 percent of the mortgage amount allocated for rehabilitation or $350.

Mortgage Insurance

Mortgage insurance is a necessary feature of most FHA loans. Mortgage insurance fees come in two types: a one-time, up-front fee charged at closing and a recurring annual fee. As of 2012, the Up-front Mortgage Insurance Premium is limited to 1.25 percent of the loan amount. This limit applies to the FHA's most widely-used loan type -- a 30-year loan with a 95 percent loan-to-value ratio. Loan-to-value represents the percentage of a home's value that is financed.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.